Posted
by
kdawson
on Sunday July 11, 2010 @05:09PM
from the nobody-to-prosecute dept.

Teppy writes "How's this for a disruptive technology? Bitcoin is a peer-to-peer, network-based digital currency with no central bank, and no transaction fees. Using a proof-of-work concept, nodes burn CPU cycles searching for bundles of coins, broadcasting their findings to the network. Analysis of energy usage indicates that the market value of Bitcoins is already above the value of the energy needed to generate them, indicating healthy demand. The community is hopeful the currency will remain outside the reach of any government." Here are the FAQ, a paper describing Bitcoin in more technical detail (PDF), and the Wikipedia article. Note: a commercial service called BitCoin Ltd., in pre-alpha at bitcoin.com, bears no relation to the open source digital currency.

In Snowcrash, after hyperinflation the federal govermnet had to post threatening signs in the restrooms about how defacing currency is illegal, specifically because the toilet paper cost more per square foot than the bills.:S

i would say that any currency is backed by the goods and services one can buy with it.

this is find and dandy if it is a fixed quantity of goods and the currency is bound to that by law. eg, the gold standard.

in the current situation with the us dollar (world's "reserve currency", lol) being backed in this manner by thin air, there is nothing to stop the government simply creating more to get themselves out of debt (inflation) thus reducing the value of goods your single dollar can buy (what you SEE as i

What is the problem with deflation? In the U.S. we had deflation for over a century and it worked out quite well. (Spiral deflation is only theoretical - it has never happened.) Hard currency has been used for thousands of years and there are no indications that any economy has resorted to mass saving or hoarding. People generally enjoy spending money and growing their wealth; it's human nature.

Inflation, on the other hand, is the root of much evil. It has utterly crushed economies and created conditions ripe for mass-murdering, genocidal tyrants to come to power. Deflation has never done such a thing.

Money makes trade between two parties much easier because without some form of currency we would have to rely on a Coincidence of Wants [wikipedia.org]. It also acts as a method of informing producers what consumers are desiring, generally in a way that is much more efficient than centralized control.

There is nothing wrong with interest, per se. It allows those with capital an opportunity to increase wealth and those without capital an opportunity to create wealth. Both parties win.

Increasing taxes generally has the effect of reducing economic activity (Laffer Curve [wikipedia.org]). Using taxes to control the money supply would have the effect of destroying production.

The concern of the solvency of the lender should only be for the interested parties. However, in your example of fractional-reserve lending this can really only be practiced with paper currency. In order to make a loan, the currency must be provided. If a bank has $10 of deposits and wishes to make $15 in loans, it must find the extra $5 from some place. In the case of a hard currency, it must find another party to provide the $5, but in the case of a paper currency, it simply gets the money from the central bank at some interest rate that is probably at a rate below what the market would demand for that money.

Inflation, even a 'small' amount, has the effect of encouraging malinvestment. When people know that come time to retire, that $10,000 they added to their savings this year is only going to be worth $5000 when they retire, they know that they must put this money some place to protect it from inflation. But people are generally poor at choosing places to invest their money, and they are downright awful when they feel pressured to do so. They invest in stocks that don't give dividend yields; they invest in real estate and have no idea why. In short, they invest in things that are beyond their understanding because they feel pressured to do so. OTOH, if there were instead a small amount of deflation, convincing people to part with their money would be considerably more difficult. Since the average person could be confident in knowing that a penny saved is truly a penny earned, not some fraction thereof, they would stick with what they know, and the economy would grow more efficiently.

It is the paper currency that is the root of evil. Many try to speak of it as if is some new concept; the next evolutionary step after gold, but fiat currency systems have been around for thousands of years, and every society that ever engaged this policy has gone bankrupt, including Ancient Rome [wikipedia.org].

Deflation did not "work out quite well." It absolutely sucked for farmers (which, when we had deflation, was basically everyone.) You had to take out a bank loan to purchase seed up front; you would pay your loan back with interest after harvest.

Deflation makes those loans a raw deal - you might pay $1200 on a $1000 loan, but each of those dollars is worth more after a growing season's worth of deflation. Because of deflation, you pay the bank much more in constant dollars.

1) We need people to save money. They need to keep some money in reserve, to act as a negative feedback mechanism in the event of problems. When people have savings, they can better deal with problems such as job loss and emergencies. In turn this means they put less burden on public services. Also, when people have savings they feel more confident, even during bad times and continue to spend money. Basically, a healthy savings for all people can eliminate problems like the last downturn where there's a massive crisis of faith and people pull back from spending. It can smooth out the economic bumps. As such it is good not just on a personal level, but on a global level.

2) We need money to move. Money locked in a safe does no good. For money to be useful, it must move around from person to person, business to business. If it sits around, it does nobody any good. If everyone saves a lot and doesn't spend it, well then all they've really done is introduce deflation and hamstring the economy. We need the money moving around, we need it being spent to do any good.

Hmmm... So what to do about that? Well, what about if instead of locking your money in a safe, you instead give it to a bank, and they loan it out to others? Hey, then we have a system where money can be saved, and yet still used at the same time. Your savings go to increase the money supply elsewhere. It multiplies in a very real sense. Wonderful.

However, that doesn't work with deflation. The problem with deflation is, as you noted, loans become hard to afford over long periods of time. That means the only way to make them would be with negative nominal interest. Well that doesn't work, even if the real interest is positive. The reason is that you could do better, and get zero nominal interest, simply by not loaning the money. What's more all loans carry risk, so you wouldn't make a loan, even at zero percent nominal interest because there's a risk you would get repaid and thus no loan still has a higher risk.

Well with inflation, that's not the case. Here your money will lose some value in real terms if you just hang on to it and get zero percent nominal returns. So there is incentive to loan it out, despite taking on some risk. Even if the real return is nothing, you want that. You want your savings to retain their value, so you require a nominal return.

Deflation is just not good for an economy. Large amounts of inflation aren't either. Really a perfectly flat lien might be the best, no inflation or deflation, but that doesn't seem possible. Looking at historical data it doesn't seem like you can hold it steady state. That being the case, a small amount of controlled inflation is by far a better choice than swings back and forth.

Deflation is just not good for an economy. Large amounts of inflation aren't either. Really a perfectly flat lien might be the best, no inflation or deflation, but that doesn't seem possible. Looking at historical data it doesn't seem like you can hold it steady state. That being the case, a small amount of controlled inflation is by far a better choice than swings back and forth.

I believe that inflation as something good for the economy is a myth that has been perpetuated by those who take advantage of the situation and make a profit off of that inflation. Unfortunately, it has been so ingrained into modern industrial societies for so long that very few if any people really understand just what life without inflation could possibly be like, and too many people do long term financial planning on the presumption of future inflation that any other scenario is seen as foolish or not w

I'm not sure why you're laughing at the US dollar's status as the world's reserve currency,

Because when it was on the gold standard, this was a reasonable idea.

When nixon axed the gold standard, and the rest of the world DIDN'T revoke the reserve currency status, we affectively gave the US/US Government a blank cheque with regards to how much money they can print.

However, recent events have brought this to light, and you can bet your arse that china, et al won't continue buying T-bills for much longer.

I wrote about the problems in the Eurozone that arise from having conflicting monetary and fiscal policies in a blog entry linked to below. Basically put, the Eurozone forces member states to have materially identical monetary policies due to the unified currency and centralized state banking. Under such circumstances, nations are unable to compensate for national situations using fiscal policy alone, and their attempt to do so is a large part of what has landed Europe in the fiscal mess they're currently i

i would say that any currency is backed by the goods and services one can buy with it.

the one way to make sure a currency is usable in daily trade is for it to be accepted as tax payment by local government.

More correctly, any fiat currency (to clarify things... as opposed to a commodity-based currency such as a gold, silver, or grain backed currency) is based upon the faith of those who participate in and use that currency to buy goods and services with it in the future.

That is a huge deal and is much different than simply the mere ability to buy goods and services. A government could collapse, the currency could be devalued, or that faith in general could be broken through a variety of other means.

Perhaps the most significant example of a faith-based currency (faith in the currency, not based upon religion) was the Iraqi Dinar. After the fall of Saddam Hussein, there were many people who thought that it was going to collapse just as other currencies issued by governments that no longer exist have also collapsed. The Nazi German Mark and the Confederate Dollar are both examples of currencies that inflated in value to infinity (aka became worthless). In the case of the Iraqi Dinar, the Iraqi people were both not exactly pleased with the American occupation, and there really wasn't anything to replace the currency. Surprisingly, due to scarcity (no more money was being printed as the government bureaus making the money were destroyed) and a desire by the Iraqi people to continue on economically, the Dinar actually increased in value. In other words, the Iraqi people continued to have faith in that currency to buy future goods and services.

While certainly governments getting involved with deliberately inflating currency can destabilize that currency, it is also true that at least for awhile a currency can remain stable due to the faith of the people possessing that currency to buy something with it in the future.

It should also be noted that this is true not just for fiat currencies "in the real world" but it also applies to virtual economies in video games and MMORPGs. Surprisingly even a single-player video game can still have this impact, where a player may hoard or spend with abandon any virtual money found based upon the principle that either the money is plentiful (or without stuff to buy) or of significant value based upon the supply of that money and the potential to obtain things with it. In the case of multi-player games, it becomes a huge issue if virtual markets open up for exchange of goods and "services".

Tying fiscal policy to the amount of shiny stuff we can dig out of the ground is far sillier.

If the amount is fixed, then as the economy expands the available value per coin increases and prices drop: instant, guaranteed deflation, getting worse as the rate of value growth increases. If you want to sell something new into a stable economy, everyone else has to drop their prices to make room for you.

Fiat currency may require us to appoint agents to keep the money supply and the value supply roughly in sync, but at least it provides the mechanism to do it. With the ooooh-pritty-shiny-stuff system, so appealing to people who can't think when there's pritty shiny stuff in sight, money and value are absolutely guaranteed to get out of sync, badly. very fast, with no remedy at all. Unless of course the economy is totally stagnant, with no new wealth being created. Yeah, that's what we want.

Most people don't understand economics other than having the largest pile of money compared to their neighbors (or complaining that their neighbor has a bigger pile than they do). Wealth creation isn't generating the money itself, but rather what you can do with that money in order to get others to do things for you. If you don't understand that distinction, then it is a hopeless cause at trying to understand economics at its most basic form.

Wealth is ultimately the blood, sweat, and tears of somebody working their behind off to make something, and all of the rest of money flows from that effort. There may be physical materials involved along the way, but you are paying either directly or indirectly for somebody to extract those materials, to shape it and mold it or do something with it. The currency then becomes a more or less averaged value of whatever it is that you are doing compared to what everybody else is doing. Yes, governments can get in the way via taxes and subsidies to screw the system up and give incentives and disincentives for certain kinds of activities... and to suck up some of that wealth by the "rulers" of that society in exchange for hopefully some civil tranquility, but it all ends up being an exchange of goods (made with labor) or services (simply paying for somebody's time more directly).

It really makes no difference in the long run between a fiat currency and a commodity currency anyway. Both require acts of faith, and the medium is relatively neutral in terms of whatever it is that you are trying to obtain above and beyond the pile of money in the first place. Even gold requires faith that somebody will accept it in the future, and it has the additional problems of extreme weight and being useful only for major transactions (due to its high intrinsic value). Any concentration of gold also requires couriers and potentially body guards and other sorts of security that end up simply costing more money than it is worth. It is also placing faith that the gold won't be devalued at some point in the future.

If, for example, somebody discovers a gold nugget on an asteroid that is the size of a house and can relatively cheaply bring it to the Earth, it would cause the gold markets to crash real hard. Gold would still have some value afterward, but it wouldn't be pretty for those who have invested large amounts of their labor into gold.

Under the Federal Reserve system, the value of money is controlled
by a US organization that's insufficiently transparent. Under a gold
standard the value of money is controlled by international traders and
mining cartels. This is better... how?

Gold is "real money". Fine. What people forget is that when you
have "real money" and it gets stolen, it's "really gone". That's right.
No FDIC insurance for fractions of pennies on the dollar. Instead, theft insurance
at rates so high it would effectively nega

State-based (and territory-backed) currencies existed in the United States well into the 19th Century and even partly into the 20th Century in the case of the Alaskan Gold Rush. It was something directly tied to a lack of liquidity and the fact that the economies of those regions needed an extra jump start to get something going.

Usually state-backed currencies in the 19th Century had a one to one relationship with the U.S. Dollar, so it wasn't as big of a deal. The Federal Reserve wasn't established until

Money is money because people believe it is money. Gold-backed currency needs to have people believing that the government is actually going to turn the currency into gold (and not, say, end the gold standard). And if you trust your government enough to do that, today's system isn't much more of a stretch: trusting the government to keep the value of your currency "relatively stable" without any particular commodity attached to it.

It doesn't matter what you can use it for, so long as it is a FINITE resource and isn't easily replicated. Gold costs labour and resources to extract. The government can't just whip up a million ounces out of thin air to inflate their currency with. That gold is a result of human labour and resources spent. Fiat (paper, electronic, non backed) money can easily be replicated for far less than the labour quantity required than the goods/services it can purchase. It is thus liable to abuse by a governmen

It doesn't matter what you can use it for, so long as it is a FINITE resource and isn't easily replicated. ..That gold is a result of human labour and resources spent

A lot of worthless minerals are hard to extract I'm sure. What you're saying sounds even worse than just arbitrarily saying gold is valuable, you're saying all this work went into essentially creating something that is not really that valuable, and that work somehow added to the value?

Is by taking it out of circulation. Most of the gold we've mined isn't used for anything, it is simply inspected and then put back underground, only this time in a hole humans dug that we guard. It is artificial scarcity. The gold is there, it could be used, but it isn't because it is "backing" something. So it sits in a vault doing nobody any good.

Also, who says finite is good? What happens when the economy grows to the point that you need more gold, but none is to be had. Well then you start experiencing deflation and that is a very bad thing. Deflation is a wonderful way to get people to stop spending, stop lending, and as such to freeze the economy. Remember: Money is only good if you can spend it. Moreover, money is only good if you DO spend it. If everyone hordes money and doesn't spend it, well then what really is happening is people are refusing to trade. That means the economy stalls.

As you say, gold is only worth what it is because western cultures have an obsession with the shiny stuff and it is used as a hedge. It's real value, in terms of industrial use, is far lower. All those idiots who get gold in preparation for the collapse of society would be sorely disappointed if such a thing ever happened. Gold would be near worthless as it has few uses in a non-industrial society (basically only as decoration) and thus would be worth fuck-all as a currency in a survivalist world. More likely, Metro 2033 has the right answer and bullets would be the closest thing to currency out there (it would mostly just be direct barter).

Gold would be near worthless as it has few uses in a non-industrial society (basically only as decoration) and thus would be worth fuck-all as a currency in a survivalist world.

Fail. Gold was highly valued before the industrial revolution. Further, it wasn't just western cultures who found it valuable (unless you include ancient Egypt and the Ottoman empire as either post-industrial or western states).

But that was based on historical tradition. There have been several generations born in which the meme of "gold=money" has not been culturally transmitted and it has extinguished. The vast majority of the world population today think of gold as a material for jewelry and electronics. Some people are trying to use modern marketing to re-inject that meme into society, with (as can be seen from the comments here on Slashdot) mostly poor results.

Hm. I'd think that anything you designate as a currency basis will go UP in demand, making it HARDER to obtain. The current price of gold is not where it is purely because of the demands of industry and the jewelers. Its status as a pseudo-currency is inflating the price.

Maybe an ideal currency would be finite, but have no great value other than its value as such? That way, we aren't impeding lives by making a value item more difficult to obtain.

Money needs to be hard to replicate. I find it hard to believe in any digital currency that isn't managed by a centralized authority. The PayPal / Credit Card model seems the most realistic to me. It's shameful that our government doesn't provide a digital currency. The current system is akin to the days when any old bank would print their own currency. The government wants to tax Internet transactions.. well most of us pay 3+% to credit cards or PayPal.. if they'd provide their own implementation they coul

All money is virtual. Direct barter is the only thing that isn't, and even then only after the transaction has been completed. Precious metals are no different. The price of gold has gone up to 4x what it was a decade ago and it can drop again just as quickly. Clearly it isn't a reasonable, stable store of value. Also, traditionally the value of gold and other precious metals has generally been explicitly set by nations laws. For example the one sixteenth rule for the value of silver to the value of gold. S

The thing is, you're comparing the value of gold against another currency. That currency is subject to a lot of inflation, so the value of gold going up indicates it's superiority as a container of value.

The price of gold has only gone up when measured in fiat dollars. What has really happened is that the value of your dollars (and the rest of the worlds fiat money) has gone down. The resources/labour expended (real cost) to extract an ounce of gold hasn't changed that dramatically in the past decade.

The value of gold has not remained fixed either. It is subject to supply and demand like any other commodity. The cost to extract it is only the supply side of that equation. The demand side can fluctuate wildly. The price of gold has gone both up and down when measured in fiat currencies.

For fifty years, the only valid currency has been crude oil. All national currencies trade against the cost of a barrel of oil. What makes you like gold? It's just soft yellow metal. You can't fill your gas tank with gold. Military might (which is the backing for most national currencies) is certainly more useful than your silly gold.

Whenever a Bitcoin user makes a transaction, their node broadcasts the transaction to the network of nodes. When transaction data is received through a node, the node begins a proof-of-work calculation in an attempt to create a block containing the transaction. All nodes essentially race to create a block, as the first one to create a block gets Bitcoins as a reward. Once a node successfully creates a block, it broadcasts the block to the network. Other nodes receive the block, perform a proof-of-work check, and add it to their chain if it is valid. As more transactions occur, blocks are created and added ad infinitum. The longest proof-of-work block chain is acknowledged to be the oldest and most reliable account of the online transactions.

This mechanism is claimed to be virtually tamper-proof. For an attacker to manipulate the record, he must outpace all of the other nodes on the network to produce the longest proof-of-work.

The assumption that the longest one is the oldest and most reliable is invalid, Since anyone can peer, there's no reason that a peer can't fake itself as 20, 30, 100 peers, and, working on a very fast machine, produce a longer chain quickly than an older peer.

Simple - it means that they are wasting processor power instead of allowing the machines to either go into sleep mode or do some useful grid computing type work. Basically they spin the processor very hard trying to generate a "coin". Unfortunately since all the nodes do this but only one gets it, it basically comes down to "let's waste a lot of power". Stupid idea.

All he has to do is take the current longest - which the network provides, then have his own local botnet add 3 or 4 more from local peers, then broadcast have the 4 peers broadcase all 4 - including the desired one, which will be longer. Duh!

The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes

This only works in some alternate universe where botnets don't existg.

Further:

To modify a past block, an attacker would have to
redo the proof-of-work of the block and all blocks after it and then catch up with and surpass the
work of the honest nodes. We will show later that the probability

Or there will be a new form of organized crime that specializes in skimming off virtual money. The one real challenge will be in how you catch and prosecute such criminals since no nation has jurisdiction.

Well, they were told to stop with their "timeshare" currency (if that's what you are talking about), because the Constitution gives the Federal government exclusive prerogative to mint coins, but that's not why they went to jail.

They went to jail for tax evasion. If you live in America, you have to pay American taxes, even if you make up some phony currency for your transactions. Those people didn't pay their taxes.

BTW the Federal Reserve is not part of the government, just as Federal Express is not part of the government. The name is designed to deceive you but the Fed is still a private bank. It's a private corporate monopoly.

No, the Federal Reserve is part of the government. Its chairperson and its governors are appointed by the President and confirmed by the Senate. It was created by law but was granted substantial independence from political influence. By and large this is seen by economists as a good thing; independent central banks can fight inflation with more credibility if the major branches of government don't have the power to print money. What money the Fed does make -- profits, that is, after paying its own expenses -- the Fed pays back to the Treasury.

Your analogy to Federal Express is just wrong. You might make an argument for the USPS (at least in a historical context, if not how it exists now), but that is still tenuous. The Fed isn't private in any of the usual aspects: no other shareholders, profits returned to the Treasury, and its management is appointed by the typical President/Senate combo.

The Federal Reserve is a private banking institution which is run by government appointees. It is not now nor has it ever been a part of the federal government. They just happen to be the ones that are authorized to represent the Federal Government in that respect.

The Federal Reserve is a private banking institution which is run by government appointees. It is not now nor has it ever been a part of the federal government. They just happen to be the ones that are authorized to represent the Federal Government in that respect.

You can say that all you want, but to quote the Fed itself [federalreserve.gov]:

The Federal Reserve mustwork within the framework of the overall objectives of economic andfinancial policy established by the government; therefore, the descriptionof the System as "independent within the government" is more accurate.

Congress designed the structure of the Federal Reserve System to give ita broad perspective on the economy and on economic activity in all partsof the nation. It is a federal system, composed of a central, governmentalagency--the Board of Governors--in Washington, D.C., and twelve re-gional Federal Reserve Banks.

For some interesting reading The Creature from Jekyll Island [amazon.com] gives a good background on the creation of the Fed. It is the type of thing that you don't need a tinfoil hat to think it looks like a conspiracy.

As Forbes magazine Described the founding of the fed [wikipedia.org] : Picture a party of the nation's greatest bankers stealing out of New York on a private railroad car under cover of darkness, stealthily riding hundred of miles South, embarking on a mysterious launch, sneaking onto an island deserted by all but a fe

I'd recommend against using any major currency then, probably go back to either gold or bartering. The US Federal Reserve "prints" money primarily by adding a fictitious amount of money to their computer systems, which is then available to lend to other banks. At no point does the money actually exist, but it counts towards inflation anyways. And yes, having people screw with that has the potential for enormous trouble should they get it wrong.

The Wikipedia article (beyond the fact that the article is on the most unreliable data source outside of a Soviet propaganda factory) is sourced entirely to bitcoin.org. This/. article is sourced entirely to Wikipedia and to....bitcoin.org.

Pshaw! The only true reliable source of information is the guy who appears on late night television with that goofy suit with $ signs all over it who talks about getting free money from the government.

I'm convinced you could abuse Wikipedia to invent something and get most people to think it was legit. Wikipedia's checking seems to be entirely based around if something is sourced, not the quality of the source. So you set up a website, maybe two, and put up whatever bullshit you want. From those websites you link to a blog to two to give them some credibility. You have a few blogs that go around in self referential circles as blogs like to do, a couple referencing a Wikipedia article. You then write the

alternatively you just get a job as a journalist, pull some "facts" out of your arse every now and then and include them in what you write.Don't give any source.in theory the paper you're writing for is supposed to try to avoid bullshit for the sake of their reputation but unless it's going to get them sued they won't give a shit.

or read wikipedia, include whatever you read in your articles and as a bonus someone can now cite your article as a source.

I love how the Wikipedia article just assumes you know what the hell this is or how it would serve as money. Unless this currency is like gold or silver where the quantity in existence is essentially fixed, I'm not interested, since it'll be subject to inflation, and thus price inflation. We already have tons of currencies to choose from if we want monetary inflation.

That's not entirely correct, close but not quite. You get inflation/deflation when the supply of money deviates from the amount of economic activity. Money is just a placeholder for the things that you can buy with it as it tends to be inconvenient to always be dealing in whole cows and hundreds of eggs to buy everything. So, you can indeed get a similar effect with gold or silver, it's just susceptible to other sources of manipulation such as the gold and silver taken out of circulation for technological p

A ship loaded with a significant quantity sinks over the mid atlantic trench?well in practice it has gone beyond where humans can practically access it and so might as well no longer exist.

Alternatively someone might build some kind of Von Neumann machine which can extract your precious metal from seawater or mine asteroids and suddenly the value of your precious metal would drop close to zero.

Whenever someone invents a cheaper way to mine gold you're going to experience price inflation as the gold in your safe becomes less valuable.

gold is only special to people who delude themselves that it's somehow special.Food, clean water, tools, feminine hygiene products, useful information.If you're convinced fiat currencies are going to collapse these are what you should be filling your underground bunker with, not some shiny metal which will only be worth anything if people believe it has any intrinsic value.

gold is only special to people who delude themselves that it's somehow special.

Yet in practice it has a more stable history than any fiat currency. You theory that gold is not fixed is correct, but that doesn't change the fact that it is far more reliable than a currency backed by the decisions people make. Gold takes energy and effort to get out of the ground. Creating bigger and better machines takes time and effort. Essentially this forces the market itself to be very slow. Compare that to a currency which has an intrinsic rarity based entirely on someone's decision to print money.

I've installed the software (from Sourceforge) and I still don't really understand it.

I have an address to receive payments (1D3ojVLNgD7D5WEKdq37m291N3Cai5CHTU) but it seems I'll have to wait a while to generate a "coin" myself. When that's done I don't know what I'll do with it -- how could I spend it? Why would you accept it?

It's basically a decentralized barter exchange, using electronic signatures to validate the currency. I see no reason this would be preferable to any number of already-available systems for valuing goods (like, say, US dollars), unless you're an anti-government paranoid.

Because it's more convenient for international transactions. You have people swapping them across borders and only have to convert the money once, when one wishes to cash out. Rather than each and every time there's a transaction across currency types.

As someone pointed out, this article is light enough on source material that it may count as more of a slashvertizement. That said, if Bitcoin, or any micropayment and/or e-cash plan scales beyond a certain level, it's gonna attract both criminals and government interest and intervention, much as age-old Islamic halawa [wikipedia.org] got a lot more notice when used by gangs like Al-Qaeda.

If i buy something for $1000 new and sell on ebay for $900 used, i am not making money, and thus should not pay tax. I already paid tax when i received the original $1000 to buy the item with. You pay tax on PROFIT, not loss.

>>Analysis of energy usage indicates that the market value of Bitcoins is already above the value of the energy needed to generate them, indicating healthy demand.

This does not mean anything - it strikes me this is the internet version of the guy we used to have in the UK who walked up and down oxford street with a placard warning against the dangers of lust and passion caused by fish, meat, bird, cheese, egg, peas, beans, nuts and sitting,

Presumably later on they start talking about the Gold Standard, Jews and the Illuminati.

The FAQ seems slashdotted, but if the currency is based on CPU time, inflation would not only be high (how many years between doubling of CPU capacity?) but also rather erratic. Every time Sony released a new 'super computer caliber' gaming station inflation would shoot up as the price of CPU time just went down.

I've been involved with the Bitcoin project for a while, and there are steps in place to prevent this. Essentially, the network tries to maintain block generation at a rate of six blocks per hour (one every 10 minutes) by checking every 2856 blocks (nominally 2 weeks) if the rate was too high or too low. At that point, all nodes adjust their hash target such that it gets more or less difficult to generate blocks.
The net result is that more nodes or faster nodes can only really influence the market for 2856 blocks. There is discussion about reducing this number to lower that time, as well.
If you'd like to discuss this with some Bitcoin participants, drop by the IRC channel: #bitcoin-dev on Freenode. I'm Lachesis on IRC.

I'm curious- from the sound of this it would be a great way for botnet herders to turn their victims electricity bills into cash(assuming I can swap my bitcoins for regular pay-my-taxes cash somehow). What measures are in place to prevent this?

If faster computers cause the system to become more complex, thus slowing generation, then wouldn't the older computers become less desirable despite not physically having changed? Mathematically, how would this work out if I created the next "Big Blue", then after joining the network, suddenly I am the only one capable of generating a coin as the bar is raised higher than the peers are capable of reaching??

I'm trying to get this picture straight: The whole purpose of the blocks and CPU time metric is to get involved with the distribution of the initial set of money, not necessarily that the currency itself necessarily requires massive quantities of computing power.

BTW, it seems like this coin generation issue is something that can be used as an attack vector, and is a different issue than the problems associated with double spending the money. What kinds of safety protocols or protection protocols are in place to keep somebody from simply "minting" money at will?

"He ought to find it more profitable to play by the rules, such rules that favour him with more new coins thaneveryone else combined, than to undermine the system and the validity of his own wealth."

I don't buy this argument, as found in the PDF file about Bitcoin. Mind you, I'm just skeptical here and not trying to say it is impossible to resolve, but I don't see the protocols or transactional security which is dealing with this issue.

"Although it would be possible to handle coins individually, it would be unwieldy to make aseparate transaction for every cent in a transfer. To allow value to be split and combined,transactions contain multiple inputs and outputs. Normally there will be either a single inputfrom a larger previous transaction or multiple inputs combining smaller amounts, and at most twooutputs: one for the payment, and one returning the change, if any, back to the sender.

"It should be noted that fan-out, where a transaction depends on several transactions, and thosetransactions depend on many more, is not a problem here. There is never the need to extract acomplete standalone copy of a transaction's history."

I'm really curious about this particular issue and how a complete copy of the transaction's history doesn't need to be maintained. Again, it gets to the coining of the money issue, where it would seem as if the transaction trace would have to go back to when the money was coined in the first place. Some sort of planned decay of the history certainly could be used in terms of suggesting that after a certain amount of time it can be presumed that a certain bit of transaction history if valid (using a variety of metrics to make that happen that could even go beyond a pure timestamp measurement). Still, the option to view the full transaction history for what fan outs and inputs were associated with that transaction seems like a critical feature.

A base value for bitcoins is assumed to be the energy used to create it. The system itself appears to be far more profitable when operating at am exchange entity or trader. ie, the ability to control the effective value of the coin in question. Which lends the whole process to feeling more like a pyramid scheme than anything else. Now, if you wanted a lossy system that was anonymous and had morally bankrupt exchange locations it would be useful anywhere an anonymous transaction is a must.

On the flip side, because wealth is always being generated for free, a purpose built rig which excels at generating coins more efficiently would essentially be a living cash machine. This would in effect mean that the coin itself has no actual value. It's worthless because it cannot be returned to the previous state. This is somewhat important to me when a system is based on the trade of goods.

In terms of actual exchange it introduces to much latency to ensure the transaction is actually valid. In terms of instant gratification the whole thing begins to break down.

The good news is that anybody is certainly free to use it. Unfortunately, because anyone can print money (even small amounts) I'm not going to be giving up any of my items today.

So this system requires CPUs to burn scarce, real electricity in order to generate virtual electronic tokens whose only purpose is to simulate the scarcity of rare metals, so that we can continue to use the old 'exchange value' economic model in the realm of information where by definition, it does not apply.

This seems like basing an economy on burning one's food crops to prove wealth and using the ash to buy things. I'm sure it would 'work', for some definition of work, but it doesn't seem particularly... efficient. Or sensible. Granted, humans do indulge in self-destructive behaviour, but do we really have to port all our bad habits into the digital world?

So this system requires CPUs to burn scarce, real electricity in order to generate virtual electronic tokens whose only purpose is to simulate the scarcity of rare metals, so that we can continue to use the old 'exchange value' economic model in the realm of information where by definition, it does not apply.

Not to mention that Moore's Law would cause runaway inflation. And wouldn't people with access to supercomputers (University profs and students) become disproportionately wealthy?

So this system requires CPUs to burn scarce, real electricity in order to generate virtual electronic tokens whose only purpose is to simulate the scarcity of rare metals

No, it requires computing power. It just happens that electricity-based CPUs are the most powerful method we have to compute at the moment.But you could just use pen and paper, or even just your brain.

What they SHOULD be doing is generating currency by doing computational WORK for another node that will act as an employer. The currency can be in denominations of estimated processor cycles or whatever. Valuation is the big issue. There are still a lot of issues to work out, but at least it would make more sense than just burning cycles to create arbitrary crypto tokens.

But, then what does the "employer" pay with? If the only medium of exchange is barter of CPU cycles, then the employer would have to work on some problem the employee needs computed while the employee works on some problem the employer needs computed. The two sides could just work on their own problem to exactly the same accomplishment. By generating some arbitrary medium of exchange, you can increase the liquidity of a market, which is basically zero in a barter system with only a single good. Without some liquid capital to get things moving at the start, you don't have anything interesting happening.

Since the site is down and the summary is light on information, let me try and summarise this a bit better, from what I've picked up, so I might be wrong on some of the details):

Nodes connect to each other in a P2P network.
The nodes perform hashing problems, attempting to find a number that hashes to a value with a certain number of 0's at the start (binary zero's, aka, the number has to be below a certain value)
The network assigns bitcoins to those nodes who have found solutions to the hashes.
After a certain amount of time the difficulty of finding the hashes increases(an extra 0 is added to the hash solution required)
This increase in difficulty continues until eventually there will be 21million bitcoins and no more can exist.

We are currently in the inflationary stage, so the supply of bitcoins is increasing. once all 21 million have been assigned, then it will become deflationary, as no new coins can ever be created and coins that are lost are lost forever.

bitcoins can be divided into 100 million pieces, so the limit of 21 million coins is not a major stumbling block.

Essentially it's a way to create a decentralised currency with a hard limit on how much is available, ensuring that it cannot be inflated by a central government simply printing more cash or adding some numbers to a computer system.

If there is a hard limit to the total amount of currency that can exist, then what you have is a situation where the currency will not scale with the economy. That means deflation and there's no faster way to kill an economy than that.

To me it seems like the people who created it are the same kind of gold standard 'tards who cry on and on about inflation without understanding it. They see inflation as "eating up your savings" (which is doesn't so long as you put them in an interest bearing account) and thus think deflation would just be great. I mean you have more buying power for doing nothing! Wonderful!

Except it badly fucks over an economy. For one, it simply drives down spending. If you can get something for a dollar today, or two of that something for a dollar next week, it makes sense to wait as long as you can. Non-essential purchases are discouraged since the longer you wait, the more your money gets you. While that sounds like it encourages savings what it really does is screw over trade. Money only works if people spend it. People can have as much money as you want if nobody spends it it is worthless, regardless of the form it takes.

Then there's loans. The ability to make and receive loans goes to hell in a situation of continual deflation. Unless the loan is extremely short term, it won't work. Take a house loan. This is doable because even with minimal to no inflation, you know you can afford it. You know your cost will not go up in percentage terms. However with deflation? No such luck. In a situation of continual deflation, the amount of money you receive for work will go down with time. As such the payments on a loan will be a larger and larger part of income, growing until you can't afford them. To make it work, the loan would have to be offered with a negative interest. But nobody will do that, they'd simply not loan out their money instead as that is a higher rate of return and is guaranteed. Currently people will make loans because the risk of the loan is balanced against having a positive return.

I could go on, but deflation is an extremely bad thing in the long run, and with a fix currency supply you have guaranteed it. Sounds like your project needs less gold standard survivalist geeks and more economists. Tell you what, run your idea by Dr. Gerry Swanson, you get him to sign off on it, maybe I'll reexamine it. As it stands now it sounds like an extremely bad idea just from an economics standpoint, never mind any technical arguments.